Identifier
Created
Classification
Origin
09SEOUL1177
2009-07-28 00:16:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Seoul
Cable title:
SOUTH KOREA ECONOMIC BRIEFING - JULY 2009
how-toVZCZCXRO7663 RR RUEHVK DE RUEHUL #1177/01 2090016 ZNR UUUUU ZZH R 280016Z JUL 09 FM AMEMBASSY SEOUL TO RUEHC/SECSTATE WASHDC 5123 RUCPDOC/USDOC WASHDC 8910 RUEATRS/DEPT OF TREASURY WASHDC RUEHRC/DEPT OF AGRICULTURE WASHDC RHEBAAA/DEPT OF ENERGY WASHDC RUEAUSA/DEPT OF HHS WASHDC RHEHNSC/NSC WASHINGTON DC RUEHKO/AMEMBASSY TOKYO 6428 RUEHBJ/AMEMBASSY BEIJING 6342 RUEHGP/AMEMBASSY SINGAPORE 6946 RUEHHK/AMCONSUL HONG KONG 3938 RUEHSH/AMCONSUL SHENYANG 4781 RUEHVK/AMCONSUL VLADIVOSTOK 1673 RUEHIN/AIT TAIPEI 3754
UNCLAS SECTION 01 OF 03 SEOUL 001177
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN EINV ENRG ETRD KS
SUBJECT: SOUTH KOREA ECONOMIC BRIEFING - JULY 2009
UNCLAS SECTION 01 OF 03 SEOUL 001177
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN EINV ENRG ETRD KS
SUBJECT: SOUTH KOREA ECONOMIC BRIEFING - JULY 2009
1. (U) This cable is sensitive but unclassified and not/not intended
for Internet distribution.
--------------
In This Issue
--------------
-- South Korea's GDP Ranking Falls to Fifteenth Highest
-- Inflation Rate Slows to 2 Percent in June
-- Producer Prices Fall in June
-- Trade Surplus Reaches USD 21.1 Billion in First Half
-- National Growth Potential Drops by One Percent in 2009
-- ROKG's Budget to Contract Sharply in Second Half
-- Foreign Currency Reserves Rise to USD 231.7 Billion
-- IMF and OECD Revise Forecasts of ROK GDP for 2009 and 2010
-- BOK and ROKG Predict Faster Economic Recovery in Second Half
-- ROKG Picks 26 Projects for New Growth Engines
-- Korean Firms to Increase Investments in Second Half
-- ROKG to Create Facility Investment Fund
-- U.S. FED and BOK Agree to Extend the Currency Swap Agreement
-- BOK Freezes Benchmark Interest Rates at 2 Percent
Domestic Economy
--------------
1. (SBU) South Korea's GDP Ranking Falls to Fifteenth Highest World:
Bank data released in July showed that Korea's nominal Gross
Domestic Product (GDP) totaled USD 929.1 billion in 2008, falling to
fifteenth highest from fourteenth in 2007 in the World Bank's GDP
ranking of 186 countries. Korea was ranked eleventh highest in 2003
but has been surpassed by India, Brazil, Russia, and Australia.
Korea's nominal gross national income (GNI) ranking was unchanged at
14th place with USD 1.05 trillion. Korea's GDP is expected to grow
with economic recovery in 2010.
2. (SBU) Inflation Rate Slows to 2 Percent in June: According to
the National Statistical Office (NSO),consumer prices rose 2.0
percent in June from a year earlier, recording the slowest yearly
growth since August 2007. The slowdown in consumer price growth is
attributed to the lower prices of oil and other raw materials.
Consumer prices fell 0.1 percent in June from May. Prices of
agricultural and fishery products tumbled 4.8 percent from May due
to an increase in supply.
3. (SBU) Producer Prices Fall in June: The Bank of Korea (BOK)
reported that producer prices fell 0.3 percent in June for the
second consecutive month. Prices of agricultural, forestry, and
fishery products fell the most, tumbling 9.6 percent in June.
Producer prices fell 3.1 percent from a year earlier as a result of
lower oil prices and stagnant domestic demand. Producer prices are
a leading indicator of future consumer price growth.
4. (SBU) Trade Surplus Reaches USD 21.1 Billion in First Half:
According to the Korea Customs Service (KCS),the trade surplus for
the first half of this year was USD 21.1 billion. This was a record
surplus as imports decreased faster than exports. Exports fell 22.6
percent, year-on-year to USD 165.7 billion and imports tumbled 34.5
percent to USD 144.6 billion. The KCS attributed the steep decline
in imports this year to lower oil prices.
(Unit: USD million)
Jun-08 Jun-09 Change(%) H1 08 H1 09 Change(%)
TRADE
BALANCE -569 7,270 -6,909 21,096
Total Exports
37,259 32,634 -12.4 213,937 165,668 -22.6
--Home Appliances
450 882 96.0 2,777 4,802 72.9
--Vessels and etc.
2,823 5,065 79.4 18,069 3,805 31.7
--Others 33,986 26,687 -21.5 193,091 137,061 -29.0
Total Imports
37,828 25,364 -32.9 220,846 144,572 -34.5
--Oils 8,386 3,748 -55.3 44,142 20,592 -53.4
--Iron and
Steel 3,229 1,506 -53.4 17,468 10,013 -42.7
SEOUL 00001177 002 OF 003
--Others 26,213 20,110 -23.3 159,236 113,967 -28.4
(Source: Korea Customs Service)
5. (SBU) National Growth Potential Drops by One Percent in 2009: In
a press meeting on July 14, Director General Yoon Jong-won, head of
the Economic Policy Bureau of the MOSF, revealed that Korea's
potential growth rate may drop by about one percentage point to the
3 to 4 percent range this year. He also said, "The potential growth
rate is expected to improve slowly from the end of next year but the
pace of recovery will depend on efforts in investment and
employment." Korea Development Institute, Samsung Economic Research
Institute and other think tanks also warned of Korea's growth
potential weakening further as a result of sluggish investment and
productivity this year.
6. (SBU) ROKG's Budget to Contract Sharply in Second Half: The MOSF
reported that the government has spent 160.8 trillion won (USD 123.7
billion) of its original and supplementary budgets during the first
half of 2009, with only 111.9 trillion won (USD 86.1 billion)
remaining for the second half. MOSF plans to scale back government
spending in the long-term but will maintain its current expansionary
fiscal policy to bolster economic recovery. While some experts warn
that the fiscal stimulus will run out steam in the remaining six
months of the year, others, more concerned with inflationary risks,
are pleased that ROKG spending will begin to taper off in the second
half.
7. (SBU) Foreign Currency Reserves Rise to USD 231.7 Billion: The
BOK announced that Korea's foreign currency reserves reached USD
231.73 billion at of the end of June. Foreign reserves swelled USD
4.96 billion during the month and recorded the largest amount since
the end of September 2008 (USD 239.67 billion). During the first
half of the year, the reserves increased USD 30.51 billion, a record
high for a six month period. The central bank forecasts foreign
currency reserves to continue growing as the current account surplus
is expected to continue.
Finance and Structural Policies
--------------
8. (SBU) IMF and OECD Revise Forecasts of ROK GDP for 2009 and
2010The International Monetary Fund (IMF) on July 7 released its
most recent forecast, calling for the Korean economy to contract 3
percent in 2009 and grow 2.5 percent in 2010. It raised the
forecast for each year by one percentage point from its previous
projection. "Thanks to the Korean government's comprehensive and
swift fiscal, monetary and financial policies, the Korean economy
has bottomed out and wisely avoided a liquidity crisis and credit
crunch," the IMF said. The IMF sees economic growth continuing but
slowly in 2010 and recommended Korea to continue its current
expansionary policy through 2010. Meanwhile, the Organization for
Economic Cooperation and Development (OECD) released its outlook on
June 24 forecasting that Korea's GDP will contract 2.2 percent in
2009 and grow 3.5 percent in 2010, the best performance among OECD
member countries. The OECD composite leading indicator (CLI) for
Korea rose to 99.8 in May, up 2.2 points from 97.6 in April. It was
the sixth consecutive increase since posting 90.2 in November 2008.
9. (SBU) BOK and ROKG Predict Faster Economic Recovery in Second
Half: The BOK forecasts the economy to grow 0.2 percent in the
second half of 2009 from a year earlier. It revised its projection
of a 0.6 percent contraction in April as the economy shows signs of
increase in domestic and overseas demand. The economy shrank 3.4
percent in the first half of the year as the BOK expected. The BOK
also revised its projection upward for the economy to contract 1.6
percent in 2009 from a 2.4 percent contraction in April. The
economy is expected to grow 3.6 percent in 2010 as the global
economy recovers and domestic and overseas demand increase. It is
the most optimistic outlook for 2010 thus far. On June 25, the MOSF
raised its GDP forecast for 2009 to a 1.5 percent contraction from
its previous projection in April of a 2 percent contraction. Strong
performances in the mining, manufacturing, electric, and gas
industries are expected to boost economic growth in the second
half.
10. (SBU) ROKG Picks 26 Projects for New Growth Engines: The
SEOUL 00001177 003 OF 003
Ministry of Knowledge Economy (MKE) announced 26 smart projects in
new growth engines. The government will finance the research and
development of these projects which will be taken on by both large
conglomerates and several small and medium-sized enterprises (SMEs).
A total of 155 billion won (USD 119 million) will fund projects in
eight major fields including biopharmaceuticals (USD 23 million),
environmentally-friendly cars (USD 23 million),light-emitting diode
(LED) applications (USD 19 million),system semiconductors (USD 18
million),and robotic applications (USD 8 million). A consortium
led by Samsung Electronics was designated for a biopharmaceutical
project.
11. (SBU) Korean Firms to Increase Investments in Second Half: The
Korea Chamber of Commerce and Industry (KCCI) conducted a survey on
facility investment plans of 1,000 domestic companies for the second
half of 2009. The survey revealed that companies plan to increase
their investment in facilities by an average of 3.0 percent in the
second half of the year. Facility investment fell 7.9 percent
year-on-year in the first half of the year as a result of the
economic and financial crisis. Factors behind the
increase in investment are: production of new products and
technological development (24.0 percent),preparation for the future
(23.6 percent),improvement in aging facilities (18.3 percent),and
recovery of domestic demand or exports (17.1 percent). Companies in
the electric power and gas sector accounted for the largest portion
(11.1 percent) of those planning investment.
12. (SBU) ROKG to Create a Facility Investment Fund: At a meeting
between President Lee Myung-bak and corporate CEOs, the government
revealed its plans to stimulate business investment and job
creation. The government plans to establish
a 10 trillion won (USD 7.6 billion) facility investment fund. It
plans to use 5 trillion won (USD 3.8 billion) in lending from the
Korean Development Bank (KDB),the Industrial Bank of Korea (IBK),
and the National Pension Service (NPS) by August and another 5
trillion won (USD 3.8 billion) from KDB and IBK at a later time. In
addition, the government plans to increase tax credits for R&D
investments in new growth engines and core technologies. Large
companies may be able to deduct up to 25 percent of R&D investment
in core technologies from taxable earnings, while small companies
may be able to deduct up to 35 percent.
13 (SBU) U.S. Fed and BOK Agree to Extend the Currency Swap
Agreement: On June 26, the U.S. Federal Reserve announced a
three-month extension of its currency swap agreement with the BOK to
February 1, 2010. "The BOK expects that this action of extending
its swap agreement with the Federal Reserve will contribute to the
continuing stability of the foreign currency funding market in
Korea," said a BOK official.
14. (SBU) BOK Freezes Benchmark Interest Rates at 2 Percent: The
BOK Monetary Policy Committee on July 9 decided to freeze the
benchmark interest rate at an annual level of 2.0 percent as
expected. Consumption and investment are still weak and
uncertainties regarding economic growth in the second half of the
year remain. BOK Governor Lee Seong-tae expects economic recovery
to be slow in the second half. The benchmark interest rate was cut
from 5.25 percent to 2.0 percent between October 2008 and February
this year. The rate has been left unchanged for five consecutive
months to boost economic recovery.
STEPHENS
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN EINV ENRG ETRD KS
SUBJECT: SOUTH KOREA ECONOMIC BRIEFING - JULY 2009
1. (U) This cable is sensitive but unclassified and not/not intended
for Internet distribution.
--------------
In This Issue
--------------
-- South Korea's GDP Ranking Falls to Fifteenth Highest
-- Inflation Rate Slows to 2 Percent in June
-- Producer Prices Fall in June
-- Trade Surplus Reaches USD 21.1 Billion in First Half
-- National Growth Potential Drops by One Percent in 2009
-- ROKG's Budget to Contract Sharply in Second Half
-- Foreign Currency Reserves Rise to USD 231.7 Billion
-- IMF and OECD Revise Forecasts of ROK GDP for 2009 and 2010
-- BOK and ROKG Predict Faster Economic Recovery in Second Half
-- ROKG Picks 26 Projects for New Growth Engines
-- Korean Firms to Increase Investments in Second Half
-- ROKG to Create Facility Investment Fund
-- U.S. FED and BOK Agree to Extend the Currency Swap Agreement
-- BOK Freezes Benchmark Interest Rates at 2 Percent
Domestic Economy
--------------
1. (SBU) South Korea's GDP Ranking Falls to Fifteenth Highest World:
Bank data released in July showed that Korea's nominal Gross
Domestic Product (GDP) totaled USD 929.1 billion in 2008, falling to
fifteenth highest from fourteenth in 2007 in the World Bank's GDP
ranking of 186 countries. Korea was ranked eleventh highest in 2003
but has been surpassed by India, Brazil, Russia, and Australia.
Korea's nominal gross national income (GNI) ranking was unchanged at
14th place with USD 1.05 trillion. Korea's GDP is expected to grow
with economic recovery in 2010.
2. (SBU) Inflation Rate Slows to 2 Percent in June: According to
the National Statistical Office (NSO),consumer prices rose 2.0
percent in June from a year earlier, recording the slowest yearly
growth since August 2007. The slowdown in consumer price growth is
attributed to the lower prices of oil and other raw materials.
Consumer prices fell 0.1 percent in June from May. Prices of
agricultural and fishery products tumbled 4.8 percent from May due
to an increase in supply.
3. (SBU) Producer Prices Fall in June: The Bank of Korea (BOK)
reported that producer prices fell 0.3 percent in June for the
second consecutive month. Prices of agricultural, forestry, and
fishery products fell the most, tumbling 9.6 percent in June.
Producer prices fell 3.1 percent from a year earlier as a result of
lower oil prices and stagnant domestic demand. Producer prices are
a leading indicator of future consumer price growth.
4. (SBU) Trade Surplus Reaches USD 21.1 Billion in First Half:
According to the Korea Customs Service (KCS),the trade surplus for
the first half of this year was USD 21.1 billion. This was a record
surplus as imports decreased faster than exports. Exports fell 22.6
percent, year-on-year to USD 165.7 billion and imports tumbled 34.5
percent to USD 144.6 billion. The KCS attributed the steep decline
in imports this year to lower oil prices.
(Unit: USD million)
Jun-08 Jun-09 Change(%) H1 08 H1 09 Change(%)
TRADE
BALANCE -569 7,270 -6,909 21,096
Total Exports
37,259 32,634 -12.4 213,937 165,668 -22.6
--Home Appliances
450 882 96.0 2,777 4,802 72.9
--Vessels and etc.
2,823 5,065 79.4 18,069 3,805 31.7
--Others 33,986 26,687 -21.5 193,091 137,061 -29.0
Total Imports
37,828 25,364 -32.9 220,846 144,572 -34.5
--Oils 8,386 3,748 -55.3 44,142 20,592 -53.4
--Iron and
Steel 3,229 1,506 -53.4 17,468 10,013 -42.7
SEOUL 00001177 002 OF 003
--Others 26,213 20,110 -23.3 159,236 113,967 -28.4
(Source: Korea Customs Service)
5. (SBU) National Growth Potential Drops by One Percent in 2009: In
a press meeting on July 14, Director General Yoon Jong-won, head of
the Economic Policy Bureau of the MOSF, revealed that Korea's
potential growth rate may drop by about one percentage point to the
3 to 4 percent range this year. He also said, "The potential growth
rate is expected to improve slowly from the end of next year but the
pace of recovery will depend on efforts in investment and
employment." Korea Development Institute, Samsung Economic Research
Institute and other think tanks also warned of Korea's growth
potential weakening further as a result of sluggish investment and
productivity this year.
6. (SBU) ROKG's Budget to Contract Sharply in Second Half: The MOSF
reported that the government has spent 160.8 trillion won (USD 123.7
billion) of its original and supplementary budgets during the first
half of 2009, with only 111.9 trillion won (USD 86.1 billion)
remaining for the second half. MOSF plans to scale back government
spending in the long-term but will maintain its current expansionary
fiscal policy to bolster economic recovery. While some experts warn
that the fiscal stimulus will run out steam in the remaining six
months of the year, others, more concerned with inflationary risks,
are pleased that ROKG spending will begin to taper off in the second
half.
7. (SBU) Foreign Currency Reserves Rise to USD 231.7 Billion: The
BOK announced that Korea's foreign currency reserves reached USD
231.73 billion at of the end of June. Foreign reserves swelled USD
4.96 billion during the month and recorded the largest amount since
the end of September 2008 (USD 239.67 billion). During the first
half of the year, the reserves increased USD 30.51 billion, a record
high for a six month period. The central bank forecasts foreign
currency reserves to continue growing as the current account surplus
is expected to continue.
Finance and Structural Policies
--------------
8. (SBU) IMF and OECD Revise Forecasts of ROK GDP for 2009 and
2010The International Monetary Fund (IMF) on July 7 released its
most recent forecast, calling for the Korean economy to contract 3
percent in 2009 and grow 2.5 percent in 2010. It raised the
forecast for each year by one percentage point from its previous
projection. "Thanks to the Korean government's comprehensive and
swift fiscal, monetary and financial policies, the Korean economy
has bottomed out and wisely avoided a liquidity crisis and credit
crunch," the IMF said. The IMF sees economic growth continuing but
slowly in 2010 and recommended Korea to continue its current
expansionary policy through 2010. Meanwhile, the Organization for
Economic Cooperation and Development (OECD) released its outlook on
June 24 forecasting that Korea's GDP will contract 2.2 percent in
2009 and grow 3.5 percent in 2010, the best performance among OECD
member countries. The OECD composite leading indicator (CLI) for
Korea rose to 99.8 in May, up 2.2 points from 97.6 in April. It was
the sixth consecutive increase since posting 90.2 in November 2008.
9. (SBU) BOK and ROKG Predict Faster Economic Recovery in Second
Half: The BOK forecasts the economy to grow 0.2 percent in the
second half of 2009 from a year earlier. It revised its projection
of a 0.6 percent contraction in April as the economy shows signs of
increase in domestic and overseas demand. The economy shrank 3.4
percent in the first half of the year as the BOK expected. The BOK
also revised its projection upward for the economy to contract 1.6
percent in 2009 from a 2.4 percent contraction in April. The
economy is expected to grow 3.6 percent in 2010 as the global
economy recovers and domestic and overseas demand increase. It is
the most optimistic outlook for 2010 thus far. On June 25, the MOSF
raised its GDP forecast for 2009 to a 1.5 percent contraction from
its previous projection in April of a 2 percent contraction. Strong
performances in the mining, manufacturing, electric, and gas
industries are expected to boost economic growth in the second
half.
10. (SBU) ROKG Picks 26 Projects for New Growth Engines: The
SEOUL 00001177 003 OF 003
Ministry of Knowledge Economy (MKE) announced 26 smart projects in
new growth engines. The government will finance the research and
development of these projects which will be taken on by both large
conglomerates and several small and medium-sized enterprises (SMEs).
A total of 155 billion won (USD 119 million) will fund projects in
eight major fields including biopharmaceuticals (USD 23 million),
environmentally-friendly cars (USD 23 million),light-emitting diode
(LED) applications (USD 19 million),system semiconductors (USD 18
million),and robotic applications (USD 8 million). A consortium
led by Samsung Electronics was designated for a biopharmaceutical
project.
11. (SBU) Korean Firms to Increase Investments in Second Half: The
Korea Chamber of Commerce and Industry (KCCI) conducted a survey on
facility investment plans of 1,000 domestic companies for the second
half of 2009. The survey revealed that companies plan to increase
their investment in facilities by an average of 3.0 percent in the
second half of the year. Facility investment fell 7.9 percent
year-on-year in the first half of the year as a result of the
economic and financial crisis. Factors behind the
increase in investment are: production of new products and
technological development (24.0 percent),preparation for the future
(23.6 percent),improvement in aging facilities (18.3 percent),and
recovery of domestic demand or exports (17.1 percent). Companies in
the electric power and gas sector accounted for the largest portion
(11.1 percent) of those planning investment.
12. (SBU) ROKG to Create a Facility Investment Fund: At a meeting
between President Lee Myung-bak and corporate CEOs, the government
revealed its plans to stimulate business investment and job
creation. The government plans to establish
a 10 trillion won (USD 7.6 billion) facility investment fund. It
plans to use 5 trillion won (USD 3.8 billion) in lending from the
Korean Development Bank (KDB),the Industrial Bank of Korea (IBK),
and the National Pension Service (NPS) by August and another 5
trillion won (USD 3.8 billion) from KDB and IBK at a later time. In
addition, the government plans to increase tax credits for R&D
investments in new growth engines and core technologies. Large
companies may be able to deduct up to 25 percent of R&D investment
in core technologies from taxable earnings, while small companies
may be able to deduct up to 35 percent.
13 (SBU) U.S. Fed and BOK Agree to Extend the Currency Swap
Agreement: On June 26, the U.S. Federal Reserve announced a
three-month extension of its currency swap agreement with the BOK to
February 1, 2010. "The BOK expects that this action of extending
its swap agreement with the Federal Reserve will contribute to the
continuing stability of the foreign currency funding market in
Korea," said a BOK official.
14. (SBU) BOK Freezes Benchmark Interest Rates at 2 Percent: The
BOK Monetary Policy Committee on July 9 decided to freeze the
benchmark interest rate at an annual level of 2.0 percent as
expected. Consumption and investment are still weak and
uncertainties regarding economic growth in the second half of the
year remain. BOK Governor Lee Seong-tae expects economic recovery
to be slow in the second half. The benchmark interest rate was cut
from 5.25 percent to 2.0 percent between October 2008 and February
this year. The rate has been left unchanged for five consecutive
months to boost economic recovery.
STEPHENS